The press backgrounder for the Volcker rule makes for interesting reading. Not least the parts where a “SENIOR ADMINISTRATION OFFICIAL” discusses the future contours of the financial system:
The 10 percent cap on insured deposits exists in current law. It was put in place in 1994. And what we’re saying is that deposit cap has served our country well. It needs to be updated and supplemented with a cap on other forms of funding — non-deposit funding, other forms of liabilities — so that in addition to the deposit cap there should be a cap on these other forms of liabilities with respect to the share that that institution holds in the economy.
The focus really is on making sure that in the future that firms don’t grow so concentrated that they would exceed this kind of cap overall on sources of funding. It’s designed to constrain future growth so that we don’t have the extent of concentration you see in many other major advanced countries in the world that were — resulted in way more devastating damage to those countries during the financial crisis even than occurred here in the United States. So it is an extra protection on top of the other reforms we’re proposing to limit the problem of “too big to fail” and harm to our financial system.
So, who might those countries (and the guilty banks) be?
Goldman Sachs has been crunching some numbers and has come up with a handy league table.
And all the usual suspects are there:
From which Goldman draws the rather obvious and worrying conclusion that Europe can’t follow the lead of the US and cap the size its banks.
Here’s why:
Capping size is a very difficult lead to follow in Europe, as banks are much larger relative to “home market” GDP. Consider: (1) The largest banks by market cap in the US (Bank of America BAC) and the UK (HSBC) have the same level of total adjusted assets (€1.5 tn). However, these represent 15% of US GDP for BAC and 96% of UK GDP for HSBC. Cutting HSBC’s assets down to 15% of UK GDP would require a dramatic 81% asset reduction, or a six-way split.
Regulating banks size at the level of individual EU states. Introducing regulation to cap size would likely result in restricting European banks’ global scope. Consider: for BNP to reach the same BA/GDP ratio of BAC, the ratio would need to fall from 96% to 15%; this would imply an asset cut of 84% or €1.6 tn; the same effect would be achieved were the group to split in six entities.
Although it says, European regulators could take a broader a view and compare bank assets with EU GDP. And then things look rather different, if somewhat fudged.
Click to enlarge:
However, Goldman suspects EU regulators will continue on their current path:
We see three potential outcomes to the European size debate:
(1) Reducing banks’ size in line with home market GDP. In our view, this would eliminate European banks from global finance.
(2) Introducing an EU-wide and EU-funded mechanism for dealing with failed banks;
and (3) status quo on size caps for now.
In the near term, the most likely scenario is for Europe to stay on the current path of regulatory change, in our view – introducing more demanding capital, liquidity and risk metrics.
So Diamanté Bob, who lashed out at at US moves to cut banks down in size on Wednesday, has no need to worry for now. Many of Europe’s banks will remain too big to fail.
Related links:
The bank problem in a single chart – FT Alphaville
The market-maker problem – FT Alphaville